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Harry Potter and the US Economic Puzzle

Author: Roger M. Kubarych
August 6, 2007


Today’s economic and financial situation in the United States amounts to a classic “happy-sad” story—not unlike the seventh, and presumably last, Harry Potter book, which is setting sales records around the world (and keeping readers of all ages glued to the 800-odd page tome, and out of the shopping malls!). A festive wedding, a near assassination, a hair-raising escape: all in the first 160 pages!

Much is happy in the US economic scene.  The stock market, though turbulent in recent days, has touched new historical peaks.  The economy is moving ahead briskly after a lull last winter that lasted barely three months.  Industrial production is up.  Exports are growing.  Job creation is continuing at a solid pace. The unemployment rate is holding steady at a level economists used to believe was unattainable without accelerating inflation, which the US does not have.  Long-term interest rates are staying relatively stable, making it cheaper for the US government to finance its budget deficit. Meanwhile, ample credit availability at modest cost is permitting all manner of corporate capital expenditures, mergers, and takeovers to go forward.  

But, there is a sad part to the story, too:  The housing market, where the vast majority of Americans have the bulk of its net worth, continues to slump.  Builders, suffering from a big drop in demand that has pushed down new home prices, are gloomy that any recovery is likely soon.  Potential home buyers of questionable credit standing are finding that the so-called “sub-prime” market has seized up, as delinquencies and foreclosures mount.  Two Bear Stearns-promoted hedge funds specializing in these risky mortgage-backed securities have failed, and investment pools run by some other investment managers are said to be in trouble. 

Problems continue outside the housing sector, too.  For instance, auto companies are boosting car production, even as consumers are reacting to sky-high gasoline prices by curbing demand.  Maybe they are not building up inventories to meet immediate needs.  Instead, the companies may be trying to strengthen their negotiation positions ahead of crucial labor talks with the United Auto Workers, the main union, from which the companies are seeking substantial concessions on wages and health insurance costs. 

Can we reconcile these disparities by looking at business and consumer surveys?  Not really.  For every positive business survey, like the ISM purchasing managers index, another is pointing down, like the small businesses polled by the National Federal of Independent Business.  CEOs of the biggest corporations are uneasy, looking over their shoulders at potential private equity acquirers.  Consumer surveys have been up and down for months, with the stock market rally and the good jobs situation lifting sentiment, but steep gasoline prices and declining home values creating anxiety.

This divergence is especially evident in surveys of attitudes toward globalization.  In just the past few weeks, two reputable polls have asked whether globalization is on balance good or bad for the United States.  In the survey this spring co-sponsored by the Chicago Council on Foreign Relations and WorldPublicOpinion.org, 60% of American respondents said globalization was mostly good.  Only 35% judged it was mostly bad. But just a few weeks later, the FT/Harris poll posed virtually the same question and only 18% of Americans responded that globalization is having a positive effect on the US, while 43% said it was having a negative effect. (The remainders in both polls represented respondents who were unsure, an honest answer.) 

It’s too early to predict how economic issues will play out in next year’s US presidential election.  The numbers themselves would point to the economy as a plus for the Republican candidate.  But the mood of the American electorate is highly changeable, as was demonstrated last fall when the Democrats won a largely unexpected victory in the 2006 Congressional elections. 

If economic growth should falter next year, both political parties are bound to put at least part of the blame on foreign countries. 

Thus, globalization may turn out to be the “Voldemort” of the tale.  The evil Voldemort confounds Harry and his pals by dividing up his soul into seven horrors against which they must struggle. In the real world, like Harry Potter’s fictional version, globalization has multiple facets.  Many of them are the source of profound fears among citizens of the advanced industrial countries.  But in next year’s political campaign, the spotlight will shine particularly brightly on just one of them: the gaping bilateralUS trade deficit with China.  That is a chapter of the “sad story” for which neither the Bush administration nor the Democratic-Party controlled Congress has an easy solution.  Even Harry Potter’s magical powers would not be up to the task! 

This article appears in full on CFR.org by permission of its original publisher. It was originally available here (Subscription required).

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